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July 07, 2017 location Mumbai

Consumption revival to India Inc's aid in Q1

However, rise in input costs, rupee appreciation and pre-GST output cuts to cap growth

CRISIL Research, India’s largest independent and integrated research house, expects the aggregate top line of companies in key sectors – excluding BFSI and oil – to have grown ~7% on-year in the first quarter of the current fiscal. These sectors account for ~61% of the market capitalisation of NSE-listed companies.

The growth rides on a pickup in consumption, though it remains range-bound at 6-8% for the sixth straight quarter since the breakout in Q4 FY16 from 0-2% in the preceding four quarters.

Says Prasad Koparkar, Senior Director, CRISIL Research, “Consumption-driven sectors, including automobiles, airlines, FMCG and retail, but excluding telecom, are estimated to have grown at a healthy pace of 10-11%. This is heartening, considering growth had slowed following demonetisation to 4-7% in the second half of fiscal 2017. Even commodity-linked sectors are expected to have done well, led by a robust increase in realisations in crude oil, steel and aluminium, and moderate growth in demand.”

However, export-linked sectors such as IT and pharmaceuticals, which had consistently outperformed the domestic industry by recording double-digit growth, are expected to have slowed down to only 3%, amidst a strengthening rupee, a surge in protectionism across the globe and pricing pressure in the US.

Growth for the quarter would have been higher but for the Goods and Services Tax (GST), since manufacturers are expected to have limited production to clear existing inventory – especially in automobiles, FMCG and cement – before it took effect. Indeed, there could be demand and supply disruptions in the short term due to GST, though from a long-term perspective, the new regime will lead to efficiency gains and greater tax compliance.

On the profitability front, a rise in inputs costs and pricing pressure is expected to impact margins. In fact, 60% of the sectors, accounting for over ~52% of the industry EBITDA, are expected to have seen margin contraction. Overall, EBITDA margin is expected to decline ~120 bps to 20.4%.

Says Rahul Prithiani, Director, CRISIL Research, “A rise in prices of key commodities such as crude oil, steel, aluminium and cement is expected to have pared the profitability of end-user sectors such as automobiles, petrochemicals, housing and tyres by ~130, ~230, ~330 and ~470 basis points (bps), respectively. The margin contraction could be much higher for pharma, at ~550 bps, given pricing pressure and lack of exclusivity period for generic drugs. IT services could, however, have withstood pricing pressure given the rising share of high-margin digital services.”

For fiscal 2018 overall, CRISIL Research sees an improving outlook. Rural demand should pick up driven by the favourable monsoon, farm loan waivers and higher MSP for crops. However, further acceleration in growth would ensue only with a meaningful pick-up in private-sector investments which is still a few quarters away.


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